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Trio of Central Banks Surprises Markets With Rate Cuts

By WSJ Staff 

Policy makers in India, New Zealand and Thailand moved aggressively to shore up growth and stoke inflation, all cutting interest rates by more than investors had expected.

The three central banks across the Asia Pacific region are joining an international shift toward even looser policy monetary policy. The easing comes on the back of growing global economic uncertainty, as the U.S. and China spar over trade, and after markets have moved to price in a steeper path of rate cuts from the U.S. Federal Reserve.

The Reserve Bank of New Zealand slashed its official cash rate by 0.5 percentage point to 1.0%, a steeper cut than economists had forecast. The bank signaled it could soon adopt unorthodox policy to spark growth and Governor Adrian Orr warned about the deteriorating global-growth outlook.

In response, traders ratcheted up bets on the neighboring Reserve Bank of Australia cutting its own rates in September, with swaps shifting to price in a 70% chance of a cut, from 45%.

The Australian dollar slumped to its lowest level since the global financial crisis a decade ago, while the New Zealand dollar traded at its weakest since January 2016. Prices for benchmark 10-year Australian bonds rose, sending their yields to a record low of 0.944%.

The cuts in New Zealand and elsewhere come in a jittery week for world markets, after China let the yuan depreciate in response to the U.S. increasing tariffs on its exports.

Sally Auld, chief economist at JPMorgan in Australia, said there was a degree of pre-emptiveness about the move in New Zealand, given the nation's likely vulnerability if there were also moves to devalue the U.S. dollar.

In Mumbai, the Reserve Bank of India also surprised markets by lowering its key lending rate by more than expected. It dropped its rate 0.35 percentage point, to 5.40%, where most economists had expected a 0.25 percentage point cut. It was the RBI's fourth rate reduction this year, putting the key lending rate at a nine-year low.

India was the world's fastest-growing large economy last year but this year looks like it could give the title back to China. In the three months through March, the South Asian nation's gross domestic product growth slipped to 5.8%, falling behind China's 6.4% expansion.

The three main pistons powering India's economic engine are all slowing. Corporate spending is down as banks and borrowers both try to clear out the excess debt from the last decade. The government is restricted by its promises to shrink its budget deficit. Meanwhile, even India's middle-class seems to have cut down spending, particularly on new cars and motorcycles.

In Southeast Asia, the Bank of Thailand also unexpectedly lowered its benchmark interest rate, seeking to combat a weak economic outlook in an environment of tepid inflation.

The central bank's monetary policy committee on Wednesday cut its policy rate to 1.50% from 1.75% effective immediately, according to its website.

Nine out of 11 economists polled by The Wall Street Journal had expected the central bank to hold steady and opt for administrative steps to rein in the recent strength of the baht, the Thai currency.

Some economists, however, had started calling for a rate cut after several central banks, including the Fed, eased policy in recent weeks to stimulate economic growth. Escalating trade tensions have started to weigh on export-dependent economies of Southeast Asia.

Economists expect Thailand's growth to remain under pressure amid weak exports and tourist arrivals, along with subdued growth in private investment and consumption. Inflation undershot analysts' estimates in June and July.

James Glynn, Gaurav Raghuvanshi, Corinne Abrams and Eric Bellman contributed to this article.

 

(END) Dow Jones Newswires

August 07, 2019 07:10 ET (11:10 GMT)

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